By Thomas Cox, a retired bank lawyer in Portland, Maine who serves as the Volunteer Program Coordinator for the Maine Attorney’s Saving Homes (MASH) program, cross posted from New Deal 2.0

Back in September, I was asked to give some unusual advice to a client. This woman, a resident of rural Northwestern Maine, wanted to know if she should buy the two cords of wood that she needed to heat her $48,000 home for the winter. I had previously told her that my bag of legal tricks was empty, and that I could not stop KeyBank from completing a foreclosure of its $28,000 second mortgage on her home. She was having trouble accepting the fact that it would really evict her, since she owed $50,000 on her first mortgage to a local bank, a loan on which she was current in her payments, which meant that KeyBank could recover nothing by foreclosing on its second mortgage. She told me again how, even though she had lost her job in the local paper mill, she had found other, but much lower, employment income and that she was able and willing to make reduced payments on the second mortgage. But KeyBank refused to accept reduced payments.

I had to tell my client that she should not buy the firewood, as I knew that it was planning an eviction within days. I had managed to penetrate the executive offices in Cleveland, Ohio, telling the “Executive Client Relations” person in the “Office of the President” how foolish it was to evict this woman, who had reduced income but a real willingness to devote as much of that as she could to continued second mortgage payments. The letter that I received in response told me how much KeyBank “valued” this woman as a client, how it “is committed to providing her with excellent service,” and how it regrets “any inconvenience or frustration your client may have experienced.” The letter closed by telling me, “[W]e appreciate the opportunity to respond to your concerns with quality and integrity.” That letter also told me that it was not willing to do anything at all to restructure this woman’s loan or to stop the eviction process.

After spending over $4,000 on foreclosure costs and legal fees, it purchased my client’s interest in the property at its foreclosure sale (there were no other bidders for this worthless second interest) and it did evict this woman from her home at the beginning of October. She is now living in the basement of her daughter’s house. Since the interest in this home that it purchased was still subject to the outstanding first mortgage, it then paid $50,000 to the first mortgage holder so that it could own full title to the property as it made plans to re-sell it. Thus, at this point it had over $54,000 invested in gaining full title to this property. Last week, KeyBank listed this property for sale for $44,000. It will surely net no more than $40,000, if it can sell it at all. This will leave the bank with a real cash loss of over $14,000, a woman living in her daughter’s basement who was willing to pay at least some level on her second mortgage, her community with an empty and devalued property in its midst, and a very sour taste for all of us who try to help these people.

Looking only at this loan and the personal situation of its borrower, KeyBank’s actions make no sense at all. However, along with all of the other major lenders and loan servicers in this foreclosure crisis, it does not look at these loans from a personal perspective. Everything is driven by “the numbers.” Those numbers tell financial institutions like KeyBank that it makes economic sense to avoid the costs of evaluating these loans on an individual basis. The numbers tell them not spend the money to pay employees to make individual decisions on whether a situation such as the one described here makes sense or whether ways can be found to work with the homeowner. KeyBank and the other large financial institutions and loan servicers do not care if they needlessly ruin the lives of some of their customers, as long as they can minimize the expense of dealing with their individual situations. The only “quality and integrity” that these institutions care about is the quality and integrity of their bottom lines.

I used to represent KeyBank back in my bank lawyer days. It grew out of purchases of two venerable old-line Maine banks with roots going back into the mid-1800s. Even as late as the 1990s, when I was representing KeyBank of Maine, it was still a “local bank.” There were bank officers assigned to dealing with loans such as this one who would make real human decisions on appropriate courses of action. Since these banks have gone national, they no longer care about how they hurt their individual customers, and they no longer care about the communities where those customers live. They are entirely willing to sacrifice a certain (and substantial) percentage of those customers on the altar of corporate profits. They can get away with this because they can lend money more cheaply then our local banks can — Federal monetary policies allow them to borrow money at a cheaper rate. Is this what we want from our Federal government?

Sadly, my advice to my client was correct. It was good that she did not waste her limited resources on the two cords of wood, as she no longer has a house to heat for the winter.

31 comments

“They are entirely willing to sacrifice a certain (and substantial) percentage of those customers on the altar of corporate profits.”

No.
If they were really interested in genuine profits (or loss mitigation in this case), they would have done what you suggested. What they are really doing is “extend and pretend” so that AGENTS managing the corporation (with interests opposite to the corporation itself) can perpetuate the Ponzi game a little longer.
Why are bankruptcy judges leeting this happen ?

I think your math excludes the $28,000 she owed them on the 2nd. Other than some sort of kick back from the USG, why would a 2nd foreclose on a 1st that is already underwater. (Didn’t PNC buy out Key early in the TARP game by the way?) Truly a negative NPV project on the bank’s part, whatever bank that is.

This is the time the regulators are making stupid with their “troubled debt restructurings” regulations, and such.

“Although increasing numbers of courts are continuing to reject improper and fraudulent foreclosures, the Congressional Foreclosure Panel examination of mortgage services and foreclosure practices did not include foreclosure lawyers.

Lawyers are officers of the court; knowledge of applicable laws and civil procedure is not required from mortgage lenders. In states that require judicial foreclosures, lawyers are the ones who file lawsuits to seize and sell property; and lawyers are responsible for filing and recording foreclosure property deeds.

An investigation could prove helpful to sorting out whether improper and illegal foreclosure proceedings are linked to any self-dealing conduct disadvantaging lenders, investors, homeowners, and city governments. . .”

Looks to me like the bank took a $28,000 dollar loss (assuming that was the balance on the second mortgage) and turned it into a $42,000 loss, maybe more. How many of those does a bank need to have before it is profitable to have an employee analyze those loans and make judgments based on the individual circumstances?

If it was about “numbers”, forgiving the loan would have been a better decision. (Not sure about the legal implications.)

I’m sympathetic to the human and community element but a plea for that perspective just muddies the water. Businesses exist to make money. How are these types of actions not big losers for the banks? Am I missing something?

1) That Key Bank is really that mind numbingly stupid.
2) That as tawal alludes to above, Key Bank gets some sort of government incentive to behave in such a perverse way.
3) That Key Bank securitized the $28,000 second, and all the losses, as well as any other charges generated in Key Bank’s role as servicer (could we call it “churning the loan”?), are passed on to the investors.

Assuming those are the only possible reasons then barring evidence that reasons 2 or 3 provide compensation in excess of the additional costs, which seems unlikely, odds would seem to favor reason number one. But if you have evidence that they do provide sufficient compensation please enlighten me as it may help to dissuade me from believing the world has gone mad.

Business exists to make money, but smart business looks at a long time horizon. You seem to think that making money right now, right here, is ‘making money’ and thereby excuses decisions that are damaging over the longer term.

In addition, humans are social critters; economics is a social activity. When the social goodwill, trust, and collective resources are pillaged by short-term profit taxing and ‘maximizing returns’ then the economic ecosystem is corroded and unstable. This is good for speculators, but deadly to real businesses that need time and a stable system in which to develop, test, market, and support new products and services.

Don’t know how you arrived at the conclusion that I think businesses need to make money right now. My point was that this appears to be a business loser and that that alone is all the reason necessary for the bank not to do it. If the business is actually making money by doing this, now or in the future, then I could understand it. But there appears to be little chance that will be the case. Down South appears to suggest otherwise but without some convincing evidence I don’t see it.

If it’s a loser for the bank, the human element shouldn’t matter (business wise). If it’s a winner for the bank, the human element shouldn’t matter.

Yes Key Bank found a way to throw at least 16,000 more Key Bank dollars down the drain. Corporate management in the US has run amok. In any corporate environment the scammers reach the top of the organization and then proceed to corrupt it. The usual tool of choice is the incentivatization plans to channel executive actions. These plans are not set up to further the wealth of the corporation, not to benefit the shareholders and other stakeholders in the corporation. In the mature corporate malaise they just advance some idiotic image du jour of what the stock analysts want.
The other day I was talking to a manager in a company with 12 Billion in sales. Executives are graded by gross margins, sales minus direct cost of sales. The entire organization is driven to reduce cost of sales by moving direct costs into indirect costs. Moving labor into contractors and outsourcers.
The better at cheating the executives are, the faster they are promoted.
I keep asking what technological or business knowledge did Sandy Weill bring to Citicorp. The head of the bank, like the head of AIG had to “trust” his subordinates’ competency because they had none.

Was the bank servicing the loan, possibly the loan was securitized and the losses were being taken by another party (Widow and Orphans Fund perhaps, these crumb bums love to abuse those, especially the Widows) and there were perverse incentives for the bank to foreclose such as fees, penalties, percentage of deficiency judgment etc…??

Shez why is everyone still using GAAP accounting, like anyone ever thought this consumable herd induced dreck was ever worth what some estimator/sales monkey said it was. Hell what part of the market now days…is not just some big pump and dump scam, abet some times slow suck in and herd tenderizing apparatus, only to plummet when no more suckers can be found…eh.

These guys know its going down, better to take what value added electrons are left before it hits trend or original value.

Skippy…modren houses are just little black holes…eating the planet bit by bit, but hay its making a buck right…GDP stuff.

Perhaps the lady could put the money she is saving from not having to pay any of her $78,000 borrowings (principle or interest) to a rental payment instead of ‘living in her daughter’s basement’.

She could even buy back her home for $40,000 and be in a vastly improved finanncial situation.

KeyBank have done her a huge favour – why the attempted sob story. Maybe it just fits nicely with the ‘robo-signer servicers are evil meme’, except that the reality is that the contentions here are specious.

Wow! Have you ever drunk the Neoclassical KoolAid, the Koolaid that holds, as Deirdre McCloskey put it, that “human beings are supposed to be calculating machines pursuing Prudence and Price and Profit and Property and Power.”

Could what we have here be a morality play?

What if Key Bank’s management is operating out of moral convictions? What if Key Bank’s management is so fully evangelized into the “deadbeat borrower” religion that it is willing to take the losses in order to punish this particular “deadbeat borrower”?

And the working-class borrower? Who ever expected her to operate in any way other than a moral way? After all, like the wealthy, she can’t afford to hire sociopaths to run her business for her. Working class people are raised with an ethic that impels them to behave in a way that runs counter to their economic interest, as is evidenced by this study, Low incomes make poor more conservative, study finds, that Yves linked here.

The ethnographer Elijah Anderson, in Code of the Street: Decency, Violence and the Moral Life of the Inner City, gives examples of the types of persons who embrace the working-class ethic. Here’s one example, what he dubs the “grandmother” type:

Racism, the changing economy, unemployment, and changing social values all affect the people in the community. But the grandmother, particularly if middle-aged or elderly, often takes an ideologically conservative view and tends to have little tolerance for structural explanations. Given her prior experience in the local community in the days of the manufacturing economy, in matters of idleness and unemployment she is ready to blame the victim, because she feels that there is work to be had for those who are willing to do it and that people can abstain from doing wrong if they want to. It is her belief that the various social problems plaguing the community stem more from personal irresponsibility than from any flaw in the wider system.

And here’s another example, what Anderson calls the “Decent Daddy” type:

Such a man tends to have little patience with men who fail to meet their responsibilities as fathers or husbands. Intolerant of excuses that blame discrimination or the lack of jobs, he holds individuals responsible, not the system, and sees resorting to “aid,” or welfare, as showing a lack of gumption. He admits that racism is a problem, but he also knows that it can be a lame excuse for not applying oneself to the task at hand. He believes that in this world you make your own bed and that you can succeed if you try. With such presuppositions he approaches the young men he finds unemployed on the streets today. He truly finds it difficult to sympathize with those who cannot find work, let alone with those who do not want to work, and who through their stance insult those who do.

[….]

In many respects Mr. Moses is the epitome of the decent daddy, playing the role not only in his own household but also in the neighborhood, providing especially strong support to the local children and, in doing so, playing the part of old head. In Mr. Moses’s day role models were available, people who set powerful examples of the work ethic and personal responsibility.

Working class people in the United States have been so systematically demonized over the last 30 years, and people like yourself have bought so thoroughly into this disinformation campaign, that you have absolutely no knowledge of how working-class people order their lives. And perhaps the only reason I’m not just like you is that I come from a working-class family. With the ongoing campaign to demonize working-class people, taking place within the neoclassical theoretical framework that is now our national religion, how could someone raised in a middle-class or upper-class family live in anything but a defactualized world?

I am the product of an upper middle class family. Dad had a nice business that generated a very reliable and livable income and we had a nice Pierce Arrow and a nice apartment on North Lake Shore Drive in Chicago. Summers we went fishing, usually to Canada or northern Minnesota, three weeks in August.

Much of what I see in the financial space is very curious indeed. We have rampant fraud and no prosecutions. It bedevils me that this stuff is going on. Countrywide didn’t convey the note. Net, the trust that is supposed to own and hold the note is a nullity. What I want to know is: How long will it be before we see the TV ads seeking claimants to join a class action for damages on RMBS’s that have no legal standing with respect to several billion dollars of home loan loans?

I was taught to cherish my child’s vision that sees what is. What I see and hear is a lot of stuff that skirts the reality at hand. What I see is fraud and corruption on a massive scale. Now, what philopsy explains what I see other than that the human condition knows no boundary in its capacity to lie cheat and steal.

Give us a quote, something new, Hannah Arendt is geting old and somewhat astigmatic in her focus relative to what lays before us and even engulfs us in a miazma of fraud.

RIIIIIIIGHT. You know, it is also cheaper to go on vacation in the off season – you can save thousands. For that matter, I don’t know why those poor people don’t just buy in bulk like I do. Sure, you need to have $40 on hand for the giant package of toothpaste, but you save per unit.

other factors my apply. with credit standing ruined, she may have difficulty finding a landlord who will rent to her. and in rural areas rentals can be few and far between. and/or, while living with her daughter, she may be saving up first and last months’ rent and security deposit. also without good credit standing, how will she be able to get a secured loan again? (and aren’t even high scorers getting turned down these day?)

Exactly. I am so tired of everyone getting their pity stories published and screaming about how banks are evil. Listen, the lady entered in the contract saying she would pay her mortgage whether it was a first or a second is beside the point. Therefore when she doesn’t pay, the bank can kick her out of her house, period. Maybe she should have thought about this before she took out the second mortgage. I am sure some of you bank haters will say well they qualified her for the loan so they are the bad ones and they are losing money so why foreclose. Listen as someone above said b/c of this crisis I am sure there are incentives for them to foreclose and get the property off their books. And in response to the people that will say they qualified her for the loan, no bank has ever put a gun to my head to make me sign for a mortgage. When my mortgage loan orginator qualified me for a $225k home I said whoa…that is way too much. I told my wife we have to go into this thinking about being able to pay this mortgage in times of joblessness or if other expenses pop up. So we went for a 155k home instead. That way we could save all that extra money to pay for 12 months living expenses in case it ever came up. This lady probably lives paycheck to paycheck b/c she over spent on a home that she really couldn’t afford not because she isn’t paid enough or lost her job for a period of time but because she didn’t save any money by getting too big of a mortage or too expensive of a car or numerous other things she over spent on that she didn’t actually need. It’s called planning people. The banks just give you the opportunity for a mortgage they don’t make you get one for an amount more than you should know you can afford.

Any time a business forgets that the customer comes first, they lose loyalty, they lose customer appreciation for the service they do provide, they lose good will. This suggests to me that bank accounting is very different to any other business and they ought to be brought into line. It suggests that banks have a short term view rather than a broad picture view. It also tells us something about risk management within banks, in that it is focused at individual loan level. There is very poor aggregate risk management and very poor risk management at a top level taking into account feedback mechanisms. Most businesses work on the basis that keeping the customer happy and making money whilst balancing this against maximising your own profits is they best way forward. The US banking business model plain just does not work this way and there are too many vested interests for it to change.
If banks had a fiduciary responsibility to the customer, then I suspect in this particular case the client would have redress to litigation against the bank. Its very simple really, we expect banks to give the best advice they can, we expect banks to take a cut but we also expect them to offer a deal which helps us as well. You have a fledgling consumer protection agency whose remit probably doesn’t cover this, laws which deliberately obfuscate this expectation and political lobbying to prevent change. Ultimately it is not going to change unless the electorate force the issue.

Two words of wood is around $200. That’s life at the margins at Maine.

That Versailles, both legacy parties, our wonderful Democrat Party, our wonderful Democrat President, Barack Obama, our wonderful Republican Senators, Susan Collins and Olympia Snowe, and our wonderful Democrat Representative, Mike Michaud, did nothing to help this woman — in fact, through HAMP and by making the big banks bigger, made her situation worse — is shameful and disgusting. And evil. All of them, every single one of them, individually and severally, are responsible.

* * *

Counter-attack: What was done was what was designed to be done. Exactly like permanently high DISemployment, having this woman, and people like her, lose her home and her dignity is the desired policy outcome. From the standpoint of our ruling elites, this is a success story.

One of the most helpful things that I’ve read about the entire foreclosure mess, as it explains the underlying institutional reconfigurations, motives, and economic dynamics in a very understandable (personal) fashion.

Particularly this:

Since these banks have gone national, they no longer care about how they hurt their individual customers, and they no longer care about the communities where those customers live. They are entirely willing to sacrifice a certain (and substantial) percentage of those customers on the altar of corporate profits. They can get away with this because they can lend money more cheaply then our local banks can — Federal monetary policies allow them to borrow money at a cheaper rate. Is this what we want from our Federal government?

It seems to me that if anyone has a serious complaint about this it would be KeyBank equity and/or unsecured creditors. Accepting her best efforts on the second might be a seriously bad message to leak out to the rest of the KeyBank portfolio. You read this site’s comments for long enough and it is difficult not to conclude that there is a big population of folks out there itching to find a semi-plausible reason to stop paying their secured loans.

KeyBank is owed $28,000 on the 2nd mortgage. Buying out the 1st mortgage for $50,000 so that KeyBank can list, and hopefully sell, the house for $44,000 just adds at least $6,000 more to its original $28,000 loss on the 2nd mortgage. Add in the $4,000 in costs and KeyBank just added at least $10,000 dollars to its already locked in $28,000 loss.

This action makes no financial sense, KeyBank was much better financially off just taking its $28,000 loss and moving on.

Something else is going on here. I can speculate that KeyBank does not want to report losses on 2nd mortgages so technically after it buys out the 1st mortgage KeyBank can then “pay off” the 2nd mortgage and then report the $34,000 ($28,000 plus at least $6,000) loss as a loss on a 1st mortgage.

Losing at least $10,000 dollars more on already a $28,000 loss, just to shift where the accounting loss occurs seems like a steep price to pay. But I can see it happening because I am familiar with edicts coming down from corporate high without regard for the actual financial net result.

“Jarndyce and Jarndyce drones on. This scarecrow of a suit has, in course of time, become so complicated that no man alive knows what it means. The parties to it understand it least, but it has been observed that no two Chancery lawyers can talk about it for five minutes without coming to a total disagreement as to all the premises.”

methinks it is useless to discern logic…it’s like some Banker’s dervish…Chris Quin has a point that she is at least out of it….tattered to be sure, having to walk away from whatever she had in the house, whatever memories, attachments, and simply accept it as the loss it is.

HSBC will make out 4 times on our property. On a $235,000 mortgage, which they wouldn’t work with us on, holding us hostage at 15.625% and the property was completely illegal, HSBC jumped into foreclosure after we made it known they forged documents in court.

It goes like this…1) We’ve already paid them in cash, 91% of the entire loan amount in 5 years, 2) they made us pay for mortgage insurance in case of default, 3) they’ve already sold our loan and 4) they are now going to get the property that we had 2 contracts on for $270,000 that they made fall thru when they tacked on $57,000 in misc fees and unapplied interest.

And at the Rule 120 hearing, the judge “could do nothing” to stop this illegal behavior, even when we told him we didn’t believe that HSBC even still owned our loan !